Yellen signals the Fed will likely raise rates
Federal Reserve Chair Janet Yellen signalled Friday that the Fed will likely resume raising interest rates later this month to reflect a strengthening job market and inflation edging toward the central bank’s 2 per cent target rate.
Yellen also said in a speech in Chicago that the Fed expects steady economic improvement to justify additional rate increases. While not specifying how many rate hikes could occur this year, Yellen noted that Fed officials in December had estimated that there would be three in 2017.
The Fed will next meet March 14-15. At that meeting, Yellen said in her speech, the policymakers will “evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
Yellen’s signal of a likely rate hike this month reflects an encouraging conclusion by the Fed: That nearly eight years after the Great Recession ended, the U.S. economy has finally regained most of its health.
Her comments echoed remarks that several other Fed officials made this week suggesting that they were all but certain to resume raising rates at their next meeting.
Still, a rate increase this month isn’t necessarily a certainty. Any unexpected wave of poor economic news or worrisome global developments could give the Fed pause. The government’s jobs report for February, to be issued next Friday, will be of particular interest.
But the most recent data notably on job growth, manufacturing and consumer confidence - along with surging stock prices have been broadly encouraging.
Yellen was asked during a question-and-answer period about the Fed’s likely response to President Donald Trump’s forthcoming economic stimulus program, the details of which remain unclear. Yellen said Fed officials are inclined to wait to see which measures are approved by Congress.
“I think most of my colleagues have decided that we should just be patient and wait to see what happens,” Yellen said.
In December, the Fed raised its benchmark rate by a quarterpoint to a range of 0.5 per cent to 0.75 per cent. It was its first increase since December 2015, when the Fed raised its key rate from a record low. In estimating three rate hikes for 2017, the Fed was indicating a quickened pace of increases.
In her speech, Yellen sought to explain why the Fed has been slow to raise rates in the past two years. She pointed to the prolonged drop in oil prices that started in 2014 and slowed spending by energy companies. And she noted a sizable rise in the value of the dollar, which depressed inflation and hurt export sales by making American goods costlier overseas.
Other disruptive events last year led the Fed to proceed cautiously. They included anemic U.S. economic growth early in the year, global fears about a sharp slowdown in China and Britain’s vote to leave the European Union.
Despite all that, Yellen said, “The U.S. economy has exhibited remarkable resilience in the face of adverse shocks.”
She said she saw no evidence to suggest that the Fed has been excessively slow to raise rates or that inflation is threatening to rise too quickly.
“I therefore continue to have confidence that a gradual removal of accommodation is likely to be appropriate,” Yellen said.
At the same time, she added: “Unless unanticipated developments adversely affect the economic outlook, the process of scaling back accommodation likely will not be as slow as it was during the past couple of years.”
Before central bank officials began speaking out this week, many Fed watchers and investors had been doubtful of a rate increase this month. The assumption was that Fed officials would want to assess President Donald Trump’s proposed tax cuts and increased spending for the military and infrastructure projects, after the details of those projects and the likelihood of their congressional passage became clear.